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What Is Rate Protection?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 October 2016
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    Conjecture Corporation
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Rate protection is a type of provision that is found in most types of lending agreements. The protection helps to ensure that the borrower is protected from an increase in the rate during the period between the submission of the loan application and the approval and closing of the loan. Sometimes known as locking the loan, this approach makes it easier to obtain the best possible rate for the loan, even if there is currently a fair amount of fluctuation in terms of interest rates in the marketplace.

One of the more common examples of how rate protection can be used to best advantage is found in the application for a mortgage. Assuming that the applicant wants to buy a home and has been offered an interest rate that is near the current average fixed rate for that geographical area, the presence of rate protection means that even if that average rate should increase while the mortgage application is under consideration, the lender will still extend that lower rate to the applicant if and when the mortgage application is approved. As a bonus, most rate protection clauses also allow for what is known as a floatdown, meaning that if that average rate should drop below the quoted rate, the lender may approve the loan with that lower rate.

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The structure of rate protection effectively allows the loan applicant to be assured of receiving an acceptable rate of interest. At worst, the rate on the approved loan will be the one that applied as of the date the application is submitted. At best, the lender will approve the loan and extend the debtor a rate that is even lower, making the loan an even better proposition for the borrower.

It is important to note that laws and regulations regarding the structure of rate protection will vary from one jurisdiction to another. In some areas, the inclusion of this type of provision is mandatory, while other areas consider rate protection to be optional. Since this type of provision can make the difference between locking in an attractive rate or losing that rate while waiting for approval of the loan, consumers should take the time to determine if the rates are protected. Take the time to identify lenders who make this type of protection available as part of their standard process for accepting and processing loan applications, and use it to your advantage to time the submission of the application to coincide with an agreeable rate.

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